I enclose this Academy's memorandum to the Defence
Committee's examination of the "Framework Agreement on Measures
to Facilitate the Restructuring and Operation of the European
Defence Industry". The response is a collation of personal
views expressed by a number of Fellows. It cannot therefore be
said to represent the views of The Academy as a whole.

1. INTRODUCTION

1.1 The Royal Academy of Engineering welcomes
the opportunity to submit evidence to the Defence Committee's
examination of the "Framework Agreement on Measures to Facilitate
the Restructuring and Operation of the European Defence Industry".
The response which follows is a collation of personal views expressed
by Fellows with direct experience of the defence industry. The
views expressed are not necessarily representative of all Fellows
of the Academy.

1.2 Respondents commented that on balance
the Framework Agreement (FA) is to be welcomed, as it should be
helpful to the much-needed rationalisation of the European defence
industry. This rationalisation is essential if the European industry
has aspirations of competing directly with the USA. However, respondents
also identified a number of concerns, principally that it may
be too easy for parties to withdraw from various parts of the
Framework Agreement and that the treatment of Intellectual Property
Rights (IPR) may be over simplified.

1.3 Respondents noted that there are a number
of European Nations with significant defence industries (eg Belgium,
Netherlands) that are not parties to the FA. If the FA is to achieve
its full potential, as many European Nations should be encouraged
to join as possible. Some respondents also suggested that the
FA should be extended to other friendly non-European Nations.

2.1 RATIONALISATIONOFTHE
DEFENCE INDUSTRY

2.1 The FA accepts that rationalisation
is currently prevalent in the Defence Industry and that collaborative
projects and the establishment of Transnational Defence Companies
(TDCs) are trends that are likely to continue. It also accepts
that TDCs must be established on commercial grounds without political
interference. There are however, a number of areas where parties
can "opt out" of the agreement. Many of these "opt-outs"
are there for understandable reasons, but leave the agreement
vulnerable to political interference.

2.2 An area of concern identified by respondents
is that of "key strategic activities". Article 7 of
the FA recognises that parties may wish to retain certain capabilities
on the basis that their security of supply of defence articles
may be damaged. It also recognises that TDCs must be free to use
their commercial judgement to distribute industrial capabilities
according to economic logic. If this produces a conflict, the
FA has a consultation process but the time required for such consultations
may delay the formation of a TDC.

2.3 Article 8 allows for the reconstitution
of a key strategic activity in exceptional circumstances relating
to national security. Respondents welcomed the proposal that this
should occur with the full cost to be borne by the Parties and
not industry. However, there is concern that it will be too easy
for a Party to claim that an activity is of key strategic importance
and thus hamper the operation of a TDC. Some respondents noted
that in the past this has been complicated by the wishes of a
nation to acquire new activities as well as to preserve existing
ones (eg development of the Eurofighter control system in Germany).

2.4 Article 33 states that competition should
be the preferred method for letting defence related R&T contracts
except where a Party judges that such competition could be detrimental
to its critical security interests. Respondents commented that
this article is open to abuse as there are no clear circumstances
cited in which this might occur, leaving interpretation open to
the Parties.

3. TDCS INVOLVING
NON-PARTY
NATIONS

3.1 It is clear that up to now, restructuring
of the defence industry in the UK has veered towards the USA while
on the continent it has been concentrated within Europe. The UK
is currently involved in a number of high value projects with
the Americans and, in a number of cases, UK defence companies
own subsidiaries in the USA. A significant number of respondents
were concerned that the FA did not take this current situation
into account and wondered what the effect might be on UK/USA defence
co-operation.

3.2 The USA has always established collaborative
R&T programmes on a bilateral agreement basis with separate
allies. It is not clear whether the USA would be prepared to deal
with the Parties to the FA as a whole once the agreement is in
force and any weakening of the current UK/USA relationship would
be to the UK's detriment.

3.3 The need to rationalise the European
defence industry is well recognised and the FA is generally acknowledged
as being helpful in this respect. It should be recognised however,
that a number of European Nations with significant defence industries
(eg Belgium, Netherlands) are not currently Parties to the agreement
and to include them in the formation of a TDC may be problematic.
For the FA to make the biggest impact it is important that there
are as many signatories as possible and this should be pursued
even to include non-EU countries. There will be a limit as to
how far the FA can be extended without compromising security,
but the Parties should seek to do so.

4. INTELLECTUAL
PROPERTY RIGHTS

4.1 Part 6 of the FA deals with the treatment
of technical information. Many respondents were concerned that
the treatment of intellectual property rights in the FA was over
simplistic. In reality, government owns less and less applicable
intellectual property and much of that was produced under collaborative
programmes. In some areas, the direction of technology spin-off
has reversed to become civil to military.

4.2 The measures to assist in the exchange
of classified information are helpful, however, some of this information
may also have commercial sensitivity. This is addressed to some
extent by the FA but the obligations not to use information other
than for the purposes provided are obligations between nations
and are not extended to the owners and source of the information
where this is a company. Therefore it will be necessary for companies
to exercise care in the way they make technical information available
and not depend on the intentions of the FA alone.

5. HARMONISATIONOF DEFENCE
REQUIREMENTSAND
EXPORTS

5.1 Part 7 of the FA deals with harmonisation
of defence requirements and might form the basis of a joint European
procurement agency. The majority of respondents believe that harmonisation
of defence requirements has significant potential to save money
for the Parties through the expected economies of scale to be
achieved as a consequence of larger orders. However, it must be
emphasised that governments should restrict themselves to defining
military requirements and not get involved in defining military
equipment as has often been the case in the past (eg political
involvement in the definition of Eurofighter's wing area and engine
thrust). Harmonising defence requirements will also lead to better
interoperability and military effectiveness.

5.2 Transfer and export procedures are dealt
with in Part 3 of the FA. Respondents recognised that export orders
for defence articles contribute to economies of scale much in
the same way as harmonisation of requirements. The procedures
for exports to non-parties were welcomed but many respondents,
acknowledging that the export of arms is a controversial area,
worried that having to reach a consensus of all Party members
may result in a more restrictive list of potential export customers
than would be the case otherwise.

5.3 Article 16 specifically encourages the
use of company end-user certificates for exports rather than Government
issued certificates. This will place an additional level of responsibility
on industry.

6. GENERAL OBSERVATIONS

6.1 A number of respondents commented that
the Framework Agreement, whilst it does have useful indicators
of Government behaviour, is nothing more than an expression of
intent between nations carrying none of the obligations of a treaty.
Industry is the subject of the FA but is not party to it and probably
has no claim to its terms or compensation for their effects. Industry
should therefore be cautious of depending on the FA and should
assess the risks involved in each case.

6.2 Article 3 calls on the Parties to establish
an Executive Committee but the level and executive powers of this
committee seem to be quite modest. The success of the FA would
be greatly enhanced by a strong Executive Committee.

6.3 Many respondents commented that the
possible benefits of the FA for UK industry still rely on strong
government negotiation with the other Parties. There are a number
of critical areas where Parties can avoid parts of the FA citing
national security or key strategic activities and unless these
are challenged strongly, little will be gained.

6.4 The style of the FA is inevitably one
of an accord between nations. It may be useful to prepare an enterprise-centric
version that is more useful in helping industrial executives prepare
for the formation of a TDC.

7. SUMMARY

7.1 Benefits

7.1.1 The FA will bring a number of significant
benefits, all of which are clearly definable. Most significant
among these is that a combined European defence industry with
a co-ordinated approach to defining military requirements will
lead to significant economies of scale and potentially lower costs
to parties. Allowing TDCs to organise along commercial lines and
rationalise resources on a European scale will also lead to cost
reductions. The mechanisms to ease the transfer of restricted
information and articles between the Parties are to be welcomed
and may lead to a strengthening of European R&T.

7.2 Risks

7.2.1 The risks involved in the FA are not
straight forward and for the most part involve doubts as to the
lack of enforceability of a framework agreement and the likely
reactions of Parties when there is a perceived threat to national
capabilities. For example, Article 34 stating that "Parties
shall seek a global return rather than juste retour" is welcomed,
but respondents doubted if this could be enforced in the face
of strong opposition from one Party or another.

7.2.2 Rationalisation of the European defence
industry is desirable and respondents welcomed the fact that the
FA states that it should be carried out along commercial lines.
Respondents recognised, however, that the UK has one of the most
complete sets of capabilities in the field, and therefore has
more to lose than some other Parties with less developed defence
industries.

7.2.3 Respondents were concerned as to how
the FA would affect the current, beneficial relationship with
the USA on defence project collaboration and research. The USA
currently carries out collaborative defence programmes on an individual
basis with selected allies and respondents wondered if the USA
would be willing to deal with Parties as a single entity in the
same way.

7.3 Future Development

7.3.1 Respondents welcome the majority of
the FA, save for concerns over the loose drafting that allows
Parties flexibility in defining whether and when certain clauses
apply. Hence the main recommendation for future development of
the FA is that a review should be instigated to learn how the
FA works in practice. This review should concentrate on whether
the spirit of the FA is adhered to or whether Parties abuse various
articles in the name of national security as many respondents
fear they might.

7.3.2 Another clear recommendation is that
as many nations as possible should be encouraged to join the FA.
Respondents identified Belgium and the Netherlands as obvious
choices within Europe. There is a point at which the benefits
of expanded membership are outweighed by security considerations
and this should be taken into account in any future plans.

7.3.3 The FA is written as an accord between
nations at a governmental level. The preparation of a guidance
document concentrating on the position of the defence manufacturing
companies involved would be helpful to industry.